Germany and the European Debt Crisis


If you look closely at any financial crisis, you'll find a handful of profiteers getting rich. Think of hedge fund manager John Paulson during the mortgage-default crisis. Or George Soros, who was dubbed "the man who broke the Bank of England" when he shorted the British pound in 1992. And you can bet that many hedge funds are doing similar things in Europe right now, fostering financial chaos on the one hand and profiting from it on the other.

I was surprised to learn, however, that more than just private investors and institutions are getting in on this action. While it's common knowledge that both China and Japan may invest in a bailout package sponsored by the European Financial Stability Fund, less known is the extent to which Germany has profited from Europe's recent travails. I'd go so far as to say the European Sovereign Debt Crisis is the best thing to happen to Germany and its companies since the fall of the Berlin Wall (assuming you think that was a good thing, of course).

A country of contradictions
Germany provides a fascinating study in contradiction. It's obsessed with discipline, order, and cleanliness. Yet if Michael Lewis' book Boomerang is to be believed, its cultural lexicon is replete with analogies to excrement. According to an anthropologist quoted by Lewis, "the combination of clean and dirty -- clean exterior-dirty interior, or clean form and dirty content -- is very much a part of the German national character."

Consistent with this dichotomy, Germany didn't outwardly succumb to the excesses of the past decade. While other Europeans and Americans borrowed money cheaply to buy stuff they couldn't afford, Germans simply ignored the offer. There was no credit boom in Germany, and real estate prices there remained completely flat.

At the same time, however, German banks wholeheartedly participated in the extravaganza by lending money to American subprime borrowers, Irish real estate barons, and Icelandic banking tycoons, all of whom did things no German would ever condone. At last count, Germany's losses from doing so stood at almost $200 billion.

But Germany's losses are only the beginning of the story, for over the past three years, Germany has staged an economic recovery unmatched by any of its Western counterparts. And the thing that's keeping its counterparts down, the European sovereign-debt crisis, is the same thing facilitating its rise.

What does a Big Mac have to do with this?
You may or may not be surprised to learn that many of the world's richest countries are heavily indebted to many of the world's poorest countries -- think about China and the United States. The relative value of currencies goes a long way toward explaining this situation. In China, for example, you can buy a Big Mac for $2.27, whereas the same underwhelming burger will cost you $4.07 here at home. Substitute a toaster into the equation, and you start to see the point. Based on the relative value of currencies alone, most goods from China are half the price of goods from the United States.

The easiest way to change this situation is to simply adjust the value of the world's currencies -- i.e., to increase the value of the developing world's currencies relative to ours. While this isn't as feasible of an option for the United States, as many currencies are pegged to the U.S. deollar, it is a viable option for Europe -- and, in fact, that's exactly what's happened. The euro's value has decreased by 20% relative to the Chinese yuan since the middle of 2008. And much of this decrease can be traced to Europe's debt crisis, as currency traders are losing confidence in the European economy.


Source: St. Louis Federal Reserve database.

The mother of all contradictions
It seems odd to think that Germany benefits from the depreciation of the euro, but that's exactly what's happening. Because exports make up almost 50% of Germany's economy, proportionately more than any of its continental peers, the euro's decline has fueled the German economy more than any other. Germany's unemployment rate is at a four-year low, its exports are at a four-year high, and its borrowing costs are lower than they've ever been. This disparity is punishing Greek and French stocks more than their German counterparts.


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Sources: and Yahoo! Finance.

Observations from across the pond
From our vantage point here in the United States, it's easy to sympathize with the Germans. As with many things German, however, the situation is replete with contradictions. While Germany is being looked upon to reluctantly assuage the continent's debt woes, it's also profiting handsomely from the chaos.

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